"However, the cost of credit and those terms and conditions outside the headline rate remain a major concern, especially for SMEs."

He added: "These critical factors are not addressed by the Merlin agreement and, at a time when confidence is precarious in the face of weak demand in our key markets, we need to be doing all we can to encourage investment to happen now."

John Walker, national chairman of the Federation of Small Businesses, said the banks had "yet again missed the small business target".

He added that the lending targets failed to address the "lack of competition" in the banking sector.

"We need to see a clear change: more competition and new lines of credit opening for small firms if they are to help boost the recovery," said Mr Walker.

The four banks signed up to Project Merlin are Barclays, Lloyds, HSBC and Royal Bank of Scotland, which owns NatWest.

The agreement with the government also included limits on bonuses and improved transparency.